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MACRO: Policies and Theories Flashcards

7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 MACRO: Policies and Theories flashcards as text

  1. The 'crowding in' effect suggests that government spending can sometimes increase private investment by:

    Answer: Improving infrastructure and public goods that raise private sector productivity

    Government investment in infrastructure can raise the return on private capital, stimulating additional private sector investment.

  2. Under a flexible (floating) exchange rate, an expansionary monetary policy that lowers domestic interest rates will most likely cause the domestic currency to:

    Answer: Depreciate, boosting net exports

    Lower interest rates reduce capital inflows and increase outflows, decreasing demand for the domestic currency and causing depreciation.

  3. The 'real business cycle' theory attributes economic fluctuations primarily to:

    Answer: Technology shocks and changes in factor productivity

    Real business cycle theorists argue that economic cycles reflect optimal responses to real shocks like technological changes, not market failures.

  4. If the marginal propensity to consume (MPC) is 0.75, what is the fiscal multiplier?

    Answer: 4

    The fiscal multiplier equals 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4.

  5. Stagflation, which plagued the U.S. economy in the 1970s, is best represented in the AS-AD model as:

    Answer: A leftward shift in short-run aggregate supply

    Stagflation results from a negative supply shock that shifts SRAS leftward, simultaneously raising prices and reducing output.

  6. The Ricardian Equivalence proposition argues that deficit-financed tax cuts will not stimulate the economy because:

    Answer: Rational consumers save the tax cut anticipating future tax hikes to repay the debt

    Ricardian equivalence holds that forward-looking consumers recognize that current deficits imply higher future taxes and save accordingly.

  7. Which policy combination is most consistent with fighting a recession while keeping interest rates low?

    Answer: Expansionary fiscal policy + expansionary monetary policy

    Both expansionary fiscal and monetary policy increase aggregate demand; monetary easing keeps rates low while fiscal stimulus boosts spending.